One easy way for investors to identify great income stocks is to simply mimic the masters. After all, if a billionaire investor has put a lot of money into a high-yield stock, then the odds are pretty good that it's worthy of an investment.
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So which high-yield stocks have billionaire investors been buying lately? We asked that question to a team of investors, and they identified Icahn Enterprises L.P. (NASDAQ: IEP), General Motors (NYSE: GM), and General Mills (NYSE: GIS).
A billionaire stock with a monstrous yield
George Budwell (Icahn Enterprises L.P.): Billionaire investor Carl Icahn is well known for his uncanny ability to spot a bargain. However, the past three years haven't been kind to Icahn Enterprises L.P., his diversified holding company. Because of the fund's hefty exposure to the plummeting oil refining field through its holdings in CVR Energy, and a host of short positions that went pear-shaped during the ongoing bull market, Icahn's largest investment is currently down by approximately 53% since the start of 2014.
The bright side is that Icahn Enterprises stock now offers an exceptionally high yield of 11.65% as a result of its beeline move lower over the past three years or so. As a bonus, this diversified holding company also comes with a fairly average payout ratio of only 71%, suggesting that sky-high yield may be sustainable. On the flip side, Icahn Enterprises' balance sheet is rather problematic, to put it mildly. With a debt-to-equity ratio of 107% and free cash flows of negative $489 million over the past 12 months, the stock's monstrous yield could be in serious jeopardy, despite its reasonable 12-month trailing payout ratio.
Having said that, Icahn has been slowly increasing his stake in the company this year, helping its stock to rebound over the past three months. But a sustainable move higher may ultimately require a fundamental change in the outlook of the oil services sector, and that doesn't appear to be forthcoming anytime soon. So while this billionaire high-yield stock might look enticing because of its legendary owner, it does come with a hefty risk profile that frankly isn't suitable for most retail investors.
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Billionaires put the pedal to the metal on this high-yield stock
Sean Williams (General Motors): Though billionaires aren't infallible, they've generally built their wealth through a series of smart investments. This makes the investment moves of billionaires worth closely monitoring. Among high-yield dividend stocks that have been recently gobbled up by billionaire money managers, General Motors has piqued my interest.
According to recent 13-F filings, Warren Buffett's Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) and David Siegel's and John Overdeck's Two Sigma Investments have been aggressively adding shares of Detroit's head automaker. Buffett added 10 million shares during the second quarter, with Two Sigma tacking on nearly 3.06 million shares.
The reason we've likely seen some buying is the 7% drop in GM's shares since hitting a 52-week high roughly six months ago. Some pundits have predicted that the U.S. auto market may be peaking, which could create some tough year-over-year comparisons for Detroit's automakers come 2018 and 2019.
However, two key catalysts could buoy General Motors' stock, and they're likely the same catalysts that Buffett, Siegel, and Overdeck are eyeing. First, GM has a mammoth opportunity in China to deliver substantial market share growth. Despite being the world's largest auto market, the industry is still relatively nascent considering how rapidly China's middle class is growing. In June, GM's deliveries in China with its joint-ventures hit an all-time record of 285,191 vehicles, up 4.3%. In particular, premium brand Cadillac has performed phenomenally, with deliveries up 35% year on year, marking the 16th straight month of double-digit year-over-year growth.
The other catalyst is GM's yield itself. Currently paying out a premium 4.3% yield, which is more than double that of the broad-based S&P 500, General Motors is capable of attracting long-term income investors. These investors are great for keeping volatility down, and they're likely to buy more if the stock drops since the yield will rise.
You can also make a case that valuation is a third catalyst. The auto industry tends to be notoriously cyclical and thus is often discounting on a P/E basis to the broader market. Nevertheless, a forward P/E of six seems to offer quite the optimal risk-versus-reward for investors.
A more appropriate name might be "Generous Mills"
Brian Feroldi (General Mills): Famed investor George Soros is well known for his skills at capital allocation, so I was intrigued to find out that he recently opened up a position in General Mills.
General Mills is a food conglomerate that owns dozens of popular consumer brands, among them Betty Crocker, Bisquick, Cheerios, Haagen-Dazs, Pillsbury, and Yoplait. While the company has been selling many of these highly profitable brands for decades, there's no doubt that the company is currently facing some headwinds. General Mills' top line has retreated for several quarters in a row as consumers shift their eating habits toward healthier food options. Wall Street has responded in kind by knocking the company's stock down about 25% over the past year. That's why shares are currently trading within a few dollars of their 52-week low.
Given the struggles, why did Soros recently decide to get in? My guess is that he believes the company will ultimately be able to adapt its products to change with the times. His confidence probably stems from the company's recent moves to offer whole-grain products in its cereal line, reduce the sugar content of child-focused cereals, and switch to making its products with cage-free eggs. When combined with acquisitions of up and coming food makers such as Annie's Homegrown and Food Should Taste Good, there are reasons to believe that General Mills is deadly serious about making its products more attractive to consumers.
Investors are getting paid well to wait for this transition to take hold. The company offers a growing dividend that currently yields 3.7% and only consumes about 70% of profits. When combined with regular stock buybacks and a modest valuation -- shares are currently trading for less than 17 times forward earnings -- this perennial winner was an understandable pick for Soros.
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Brian Feroldi has no position in any of the stocks mentioned. George Budwell owns shares of Berkshire Hathaway (B shares). Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.